The Unsettling Truth about the Rolling Back of Dodd-Frank Regulations

Our nation’s history is replete with tragic examples of not getting regulation of the banking industry right. Fractional reserve banking has always held both the promise of more effectively putting wealth to work while simultaneously grappling with the perverse incentives to pursue systemic destabilizing levels of risk. The purpose of this letter is to suggest to you and your committee some principles that should guide decision-making as you craft legislation to update the Dodd-Frank Act.

The principles we are suggesting come from a careful analysis of the factors that led to our most recent 2008 financial crisis along with earlier ones. We believe that any change to Dodd Frank must have as its goal the prevention of a repeat of that painful chapter of our nation’s financial history. The effort should not set the stage for yet another crisis scenario. On the other hand, there is no doubt that some of these regulations have had some unacceptable unintended negative consequences such as the raising of fees to ordinary Americans for simple and essential bank accounts.

We believe that our background and experience qualify us to offer advice and insight on these important and complex issues. William Weirick is a PhD Economist with decades of public policy analysis experience who is also currently a local elected official. Randall Roth has an MPA from Harvard and a MSc from the London School of Economics, and has advised governments all over the world on sound financial management practices.

Principle #1: Banks must maintain sufficient capital and not be overly reliant upon leverage. If every bank was sufficient capitalized and prudently managed, there would be no need for regulations. Sadly, history has taught us that imprudently managed banks crowd out prudently managed banks when regulations are poorly crafted or inadequate. Safety must be found in adequate, well crafted, capital buffers. Regulatory authorities cannot fulfill their core responsibility to manage liquidity when they lose control over some sectors contributing to liquidity.

Principle #2: The Volker rule must be maintained and strengthened. Banks using basic citizen deposits, especially when insured by taxpayers, should be restricted in what they can invest, and must not be allowed to speculate (gamble) with those funds. Restrictions on high risk investment activity for depository institutions have been recognized for more than eighty years as an essential element of financial sector regulation. Departure from this principle has been part of every financial crisis since 1907.

Principle #3: Market Concentration must be reversed. In 2000, the market share of the largest banks was 32%; in 2014 the market share of the largest banks rose to 59%. The “too big to fail” problem has become worse. These huge banks are a danger to the nation, and another “Lehman moment” could do irreparable damage to our country. Sadly, some of the regulations promulgated under the authority of Dodd-Frank have exasperated rather than mitigated this problem. The public interest rather than the interests of dominant financial institutions should guide regulatory reforms under Dodd Frank.

We would be pleased to elaborate on these principles or provide additional information to your staff.